II

103D CONGRESS

1ST SESSION H. R. 578

IN THE SENATE OF THE UNITED STATES

MAY 5 (legislative day, APRIL 19), 1993

Received

MAY 7 (legislative day, APRIL 19), 1993

Read twice and referred to the Committee on Banking, Housing and Urban

Affairs

AN ACT

To provide for recovery of costs of supervision and regulation

of investment advisers and their activities, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Investment Adviser

5 Regulatory Enhancement and Disclosure Act of 1993’’.

6 SEC. 2. ADDITIONAL RESOURCES FOR INVESTMENT AD7 VISER SUPERVISION.

8 (a) AMENDMENT.—The Investment Advisers Act of

9 1940 (15 U.S.C. 80b–1 et seq.) is amended by inserting

10 after section 203 the following new section:
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1 ‘‘FEES FOR REGISTRANTS AND APPLICANTS

2 ‘‘SEC. 203A. (a) IN GENERAL.—The Commission is

3 authorized, in accordance with this section, to collect fees

4 to recover the costs of registration, supervision, and regu5 lation of investment advisers and their activities. Such fees

6 shall be collected, and shall be available, only to the extent

7 provided in advance in appropriations Acts. No appropria8 tion Act may authorize fees to be collected under this sec9 tion during any fiscal year unless the amount appropriated

10 by such Act for such costs for such fiscal year equals or

11 exceeds the aggregate amount that may reasonably be ex12 pected to be collected by such fees. Such fees shall be de13 posited as an offsetting collection to the Commission’s ap14 propriation and may remain available for such purposes

15 for the succeeding fiscal year. The costs covered by such

16 fees shall be limited to the costs of Commission expenses

17 for registration, examinations, and surveys of persons reg18 istered or required to register under this Act.

19 ‘‘(b) TIME FOR PAYMENT.—

20 ‘‘(1) NEW REGISTRANTS.—At the time of filing

21 an application for registration under this title, the

22 applicant shall pay to the Commission the fee speci23 fied in subsection (c). No part of such fee shall be

24 refunded to the applicant. The filing of an applica25 tion for registration under this title shall not be
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1 deemed to have occurred unless the application is ac2 companied by the fee required under this section.

3 ‘‘(2) ONGOING REGISTRANTS.—Each invest4 ment adviser whose registration is effective on the

5 last day of its fiscal year shall pay to the Commis6 sion the fee specified in subsection (c). Such pay7 ment shall be made not later than 90 days after the

8 end of its fiscal year, or at such other time as the

9 Commission, by rule, shall determine, unless its reg10 istration has been withdrawn, canceled, or revoked

11 prior to that date. No part of such fee shall be re12 funded to the investment adviser.

13 ‘‘(c) COST-BASED SCHEDULE OF FEES.—For any

14 fiscal year for which fees are authorized to be collected

15 by an appropriation Act, the amount of fees due from in16 vestment advisers in accordance with paragraphs (1) and

17 (2) of subsection (b) shall be determined according to the

18 following schedule:

‘‘Assets under management Fee due:

Less than $10,000,000 ............................................................ $300

$10,000,000 or more, but less than $25,000,000 ................... $500

$25,000,000 or more, but less than $50,000,000 ................... $1,000

$50,000,000 or more, but less than $100,000,000 ................. $2,500

$100,000,000 or more, but less than $250,000,000 ............... $4,000

$250,000,000 or more, but less than $500,000,000 ............... $5,000

$500,000,000 or more ............................................................. $7,000.

19 ‘‘(d) SUSPENSION FOR FAILURE TO PAY.—The Com20 mission, by order, may suspend the registration of any in21 vestment adviser if it finds, after notice, that such invest-
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1 ment adviser has failed to pay when due any fee required

2 by this section. The Commission shall reinstate such reg3 istration upon payment of the fee (and any penalty due),

4 if such suspension was based solely on the failure to pay

5 the fee.

6 ‘‘(e) RULEMAKING.—The Commission may adopt

7 such rules as are necessary to carry out this section.

8 ‘‘(f) DEFINITION OF ASSETS UNDER MANAGE9 MENT.—As used in this section, the term ‘assets under

10 management’ means the client assets with respect to which

11 an investment adviser provides continuous and regular su12 pervisory or management services.’’.

13 (b) EFFECTIVE DATE.—This section shall become ef14 fective upon the adoption by the Commission of imple15 menting rules, under section 203A(f) of the Investment

16 Advisers Act of 1940, as added by subsection (a).

17 SEC. 3. EXAMINATIONS AND SURVEYS.

18 The Investment Advisers Act of 1940 is amended by

19 inserting after section 222 (15 U.S.C. 80b–22) the follow20 ing new section:

21 ‘‘EXAMINATIONS AND SURVEYS

22 ‘‘SEC. 223. (a) PERIODIC EXAMINATIONS.—The

23 Commission shall establish and periodically revise a sched24 ule for the regular examination of investment advisers.

25 Such schedule shall provide for more frequent examina26 tions of certain investment advisers based on factors that
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1 the Commission determines increase the need for examina2 tion of those investment advisers, which shall include (at

3 a minimum) each of the following:

4 ‘‘(1) the frequency of customer complaints;

5 ‘‘(2) the risks associated with newly registered

6 investment advisers;

7 ‘‘(3) custody of funds and the authority to exer8 cise investment discretion;

9 ‘‘(4) the existence of deficiencies detected dur10 ing an examination under this title that may con11 tinue to present high risks to clients; and

12 ‘‘(5) the receipt of commissions for the sale of

13 investments recommended to clients.

14 ‘‘(b) SURVEYS OF UNREGISTERED PERSONS.—The

15 Commission shall, within 3 years after the date of enact16 ment of this section and periodically thereafter, provide

17 for the conduct of a survey to determine the extent of,

18 and reasons for, the failure of persons to register as re19 quired by this Act. The Commission shall, on the basis

20 of such survey results, establish objectives for the reduc21 tion or elimination of such failures and shall include in

22 annual reports to Congress (under section 23(b) of the

23 Securities Exchange Act of 1934) submitted after comple24 tion of the first survey, a statement of such objectives,

25 an evaluation of the success in attaining those objectives
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1 during the preceding year, and such recommendations as

2 the Commission considers appropriate to assist in the at3 tainment of those objectives. If the survey identifies any

4 pattern of noncompliance with the registration require5 ments of the title and the rules thereunder, the Commis6 sion’s objectives shall include such rulemaking proceedings

7 as may be required to correct such noncompliance.

8 ‘‘(c) PROVISIONS NOT LIMITATION.—The provisions

9 of this section shall not be construed to limit the authority

10 of the Commission to prescribe rules under this Act or

11 to conduct an examination or investigation at any time

12 or to institute proceedings under this title or any other

13 title.’’.

14 SEC. 4. DESIGNATION OF SELF-REGULATORY ORGANIZA15 TIONS.

16 The Investment Advisers Act of 1940 (15 U.S.C.

17 80b–1 et seq.) is amended by inserting after section 223

18 (as added by section 3 of this Act) the following new sec19 tion:

20 ‘‘DESIGNATION OF SELF-REGULATORY ORGANIZATIONS

21 ‘‘SEC. 224. (a) DESIGNATION TO CONDUCT EXAMI22 NATIONS.—The Commission, by rule, consistent with the

23 public interest, the protection of investors, and the pur24 poses of this title, may designate one or more self-regu25 latory organizations registered with the Commission under

26 section 6 or 15A of the Securities Exchange Act of 1934,
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1 to conduct periodic examinations of its members, and af2 filiates of members, that are registered or required to reg3 ister under this title, to determine compliance with appli4 cable provisions of this title and the rules and regulations

5 thereunder. Such rule shall specify the minimum scope

6 and frequency for such examinations and shall, to the ex7 tent consistent with the protection of investors, be de8 signed to avoid unnecessary regulatory duplication or

9 undue regulatory burdens. Such self-regulatory organiza10 tion may discipline such members and affiliates of mem11 bers for violations of the applicable provisions of this title

12 and the rules and regulations thereunder pursuant to the

13 standards and procedures set forth in sections 6, 15A, and

14 19 of the Securities Exchange Act of 1934. The money

15 penalties imposed by a self-regulatory organization for vio16 lations of this title shall not exceed those contained in sec17 tion 203(i).

18 ‘‘(b) LIMITATIONS.—

19 ‘‘(1) PRIMARY BUSINESS LIMITATION.—The

20 Commission shall not exercise the designation au21 thority contained in subsection (a) for members or

22 affiliates of members if the primary business of the

23 member and its affiliates is investment advisory ac24 tivities.
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1 ‘‘(2) LIMITATION WITH RESPECT TO AFFILI2 ATES OF MEMBERS.—The Commission shall not ex3 ercise the authority contained in subsection (a) for

4 an affiliate of a member if—

5 ‘‘(A) the primary business of the affiliate

6 is investment advisory activities;

7 ‘‘(B) the affiliate is an affiliate of the

8 member solely as a result of the adviser’s (or an

9 associated person of the adviser’s) registration

10 with the member as a registered representative;

11 and

12 ‘‘(C) the affiliate is a registered represent13 ative of the member solely to enable the adviser

14 to execute transactions that are incidental to

15 the investment adviser’s primary business;

16 unless the Commission determines, in accordance

17 with such other criteria as the Commission estab18 lishes by rule, that such exercise of designation au19 thority is consistent with the public interest, the pro20 tection of investors, the purposes of this title, and

21 the objectives of the Commission’s investment ad22 viser examination program.

23 ‘‘(3) LIMITATION WITH RESPECT TO SAVINGS

24 ASSOCIATION AFFILIATES OF MEMBERS.—The Com25 mission shall not exercise the authority contained in
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1 subsection (a) for an affiliate of a member if the af2 filiate is a savings association, as such term is de3 fined in section 3(b)(1) of the Federal Deposit In4 surance Act (12 U.S.C. 1813(b)(1)).

5 ‘‘(4) DEFINITIONAL RULES.—For purposes of

6 this subsection, the Commission may, by rule, estab7 lish criteria for defining the terms ‘primary business’

8 and ‘incidental to the investment adviser’s primary

9 business’.

10 ‘‘(c) AUTHORITY TO IMPOSE FEES.—

11 ‘‘(1) IN GENERAL.—Any self-regulatory organi12 zation designated by the Commission to perform the

13 examinations specified in subsection (a) shall have

14 the authority to collect fees in accordance with this

15 subsection.

16 ‘‘(2) LIMITATION.—The total fee paid by a reg17 istered investment adviser under this subsection

18 shall not exceed an amount determined in accord19 ance with rules prescribed by the Commission. Such

20 rules shall require that the fees collected by a self21 regulatory organization under this subsection—

22 ‘‘(A) cover only the costs of the self-regu23 latory organization’s expenses for examinations

24 conducted pursuant to subsection (a);
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1 ‘‘(B) as to any investment adviser, bear a

2 reasonable relationship to the costs of conduct3 ing an examination of that adviser pursuant to

4 subsection (a); and

5 ‘‘(C) not exceed such portion of the fee au6 thorized under section 203A as the Commission

7 determines is allocable to the Commission’s ex8 penses for conducting such an examination.

9 ‘‘(3) REDUCTION OF SECTION 203A FEES.—The

10 amount of any fee that a registered investment ad11 viser is required to pay under section 203A with re12 spect to any fiscal year shall be reduced by the

13 amount paid to a self-regulatory organization in ac14 cordance with this subsection with respect to such

15 fiscal year.

16 ‘‘(d) EFFECTIVE DATE OF RULE.—A rule prescribed

17 by the Commission under this section shall not be effective

18 until 90 days after the date on which the Commission sub19 mits to each House of Congress a report—

20 ‘‘(1) containing the text of the proposed rule

21 and the reasons therefor;

22 ‘‘(2) describing the procedures to be used to co23 ordinate the collection of fees by the Commission

24 under section 203A and by a self-regulatory organi25 zation under the rule; and
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1 ‘‘(3) containing such other information as may

2 be necessary to describe the implementation and en3 forcement of the rule.

4 ‘‘(e) DEFINITION.—For purposes of this section, the

5 term ‘affiliate’ shall mean any person directly or indirectly

6 controlling, controlled by, or under common control with

7 a member.’’.

8 SEC. 5. SUITABILITY AND OTHER ADVISER OBLIGATIONS.

9 (a) AMENDMENT.—Section 206 of the Investment

10 Advisers Act of 1940 (15 U.S.C. 80b–6) is amended to

11 read as follows:

12 ‘‘PROHIBITED TRANSACTIONS BY INVESTMENT ADVISERS

13 ‘‘SEC. 206. (a) PROHIBITED CONDUCT.—It shall be

14 unlawful for any investment adviser or any person associ15 ated with an investment adviser, by use of the mails or

16 any means or instrumentality of interstate commerce, di17 rectly or indirectly—

18 ‘‘(1) to employ any device, scheme, or artifice to

19 defraud any client or prospective client;

20 ‘‘(2) to engage in any transaction, practice, or

21 course of business which operates as a fraud or de22 ceit upon any client or prospective client;

23 ‘‘(3) acting as principal for his own account,

24 knowingly to sell any security to or purchase any se25 curity from a client, or acting as broker for a person

26 other than such client, knowingly to effect any sale
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1 or purchase of any security for the account of such

2 client, without disclosing to such client in writing be3 fore the completion of such transaction the capacity

4 in which he is acting and obtaining the consent of

5 the client to such transaction;

6 ‘‘(4) to engage in any act, practice, or course of

7 business which is fraudulent, deceptive, or manipula8 tive;

9 ‘‘(5) to provide investment advice to any client,

10 other than in connection with impersonal advisory

11 services, unless the adviser—

12 ‘‘(A) prior to providing any investment ad13 vice, and as appropriate thereafter, makes a

14 reasonable inquiry into the client’s financial sit15 uation, investment experience, and investment

16 objectives;

17 ‘‘(B) reasonably determines that the in18 vestment advice is suitable for the client; and

19 ‘‘(C) maintains reasonable records, in ac20 cordance with such rules as the Commission

21 shall prescribe, of the information obtained

22 from the inquiries the adviser made in comply23 ing with this paragraph; or
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1 ‘‘(6) to guarantee a client that a specific result

2 will be achieved as a result of the advisory services

3 provided by the investment adviser.

4 ‘‘(b) EXEMPTIONS AND SPECIAL RULES.—

5 ‘‘(1) EXEMPTION.—The prohibitions of sub6 section (a)(3) shall not apply to any transaction with

7 a customer of a broker or dealer if such broker or

8 dealer is not acting as an investment adviser in rela9 tion to such transaction.

10 ‘‘(2) AUTHORITY TO DEFINE AND PRE11 SCRIBE.—The Commission shall, for the purposes of

12 subsection (a)(4), by rules define, and prescribe

13 means reasonably designed to prevent, such acts,

14 practices, and courses of business as are fraudulent,

15 deceptive, or manipulative.

16 ‘‘(3) DEFINITION OF IMPERSONAL ADVISORY

17 SERVICES.—As used in subsection (a)(5), the term

18 ‘impersonal advisory services’ means any investment

19 advisory services provided—

20 ‘‘(A) by means of written material or oral

21 statements which do not purport to meet the

22 objectives or needs of specific individuals or ac23 counts;

24 ‘‘(B) through the issuance of statistical in25 formation containing no expression of opinion
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1 as to the investment merits of a particular secu2 rity; or

3 ‘‘(C) by any combination of the foregoing

4 services.’’.

5 (b) RULEMAKING REQUIRED.—The Commission shall

6 prescribe rules for purposes of paragraph (5)(C) of section

7 206(a) of the Investment Advisers Act of 1940 (as added

8 by subsection (a) of this section) within one year after the

9 date of enactment of this Act.

10 SEC. 6. ADDITIONAL DISCLOSURE OBLIGATIONS OF IN11 VESTMENT ADVISERS.

12 (a) ADDITIONAL OBLIGATIONS.—Section 204 of the

13 Investment Advisers Act of 1940 (15 U.S.C. 80b–4) is

14 amended—

15 (1) by striking the heading of such section and

16 inserting the following:

17 ‘‘PERIODIC REPORTS AND OTHER DISCLOSURE

18 REQUIREMENTS’’;

19 (2) by inserting ‘‘(a) PERIODIC AND OTHER

20 REPORTS.—’’ after ‘‘SEC. 204.’’; and

21 (3) by adding at the end the following new sub22 sections:

23 ‘‘(b) BROCHURE REQUIRED.—

24 ‘‘(1) IN GENERAL.—Each person registered

25 under section 203 of this title shall disseminate to

26 each client or prospective client a document disclos-
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1 ing material facts concerning matters listed in para2 graphs (2) and (3) and such other matters as the

3 Commission shall prescribe. In order to provide for

4 timely and effective disclosure of such facts and

5 matters to clients, the Commission shall by rule pre6 scribe the format of the document and the timing of

7 its dissemination.

8 ‘‘(2) CONTENTS OF BROCHURE.—The document

9 required by paragraph (1) shall include information

10 concerning—

11 ‘‘(A) the education and business back12 ground of such person and of any associated

13 person providing significant investment advisory

14 services to the client,

15 ‘‘(B) compensation arrangements between

16 the client and the investment adviser,

17 ‘‘(C) the nature of services offered,

18 ‘‘(D) business practices,

19 ‘‘(E) methods for obtaining information on

20 the disciplinary history and registration of the

21 investment adviser and persons associated with

22 the investment adviser, and

23 ‘‘(F) conflicts of interest which could rea24 sonably be expected to impair the rendering of

25 disinterested advice.
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1 ‘‘(3) PROMINENT DISCLOSURES.—Such docu2 ment shall also prominently disclose—

3 ‘‘(A) that—

4 ‘‘(i) the registered person receives or

5 may receive, directly or indirectly, sales

6 commissions or other fees in connection

7 with a purchase or sale effected on behalf

8 of a client; or

9 ‘‘(ii) the registered person will not re10 ceive, directly or indirectly, any sales com11 mission or other fees in connection with

12 such purchase or sale, but the client may

13 be charged a sales commission or other fee

14 by another person in connection with such

15 purchase or sale; and

16 ‘‘(B) that remedies may be available to the

17 client with respect to disputes arising out of the

18 advisory relationship.

19 ‘‘(4) DEFINITION.—The Commission shall de20 fine ‘associated person providing significant invest21 ment advisory services to the client’ by rule for pur22 poses of this subsection.

23 ‘‘(c) TRANSACTION REPORTS.—

24 ‘‘(1) INITIAL DISCLOSURE.—Before a purchase

25 or sale is effected on behalf of any client, each reg-
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1 istered investment adviser shall, in accordance with

2 rules prescribed by the Commission, disclose to the

3 client the total amount of commissions, fees, or

4 other charges that may reasonably be expected to be

5 charged in connection with the transaction (or, in

6 the case of payments from third parties, that a pay7 ment will be received) and that the adviser or a re8 lated person will receive a portion of the commission,

9 fee, charge, or payment. Such initial disclosure shall

10 be in writing if the purchase or sale was rec11 ommended in writing.

12 ‘‘(2) CONFIRMATION.—After a purchase or sale

13 is effected, each registered investment adviser shall

14 transmit to each client a written statement that dis15 closes the amount of commissions, fees, or other

16 charges charged in connection with the transaction

17 (or, in the case of payments from third parties, that

18 a payment has been or will be received). Such writ19 ten statement shall be in such form and contain

20 such information, and be provided in accordance

21 with such rules, as the Commission shall prescribe.

22 Such rules shall, to the extent consistent with the

23 protection of investors, permit delivery of a con24 firmation statement of a broker or a dealer that in25 cludes information that meets the requirements of
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1 this subsection (and the rules adopted thereunder)

2 in order to satisfy such requirements.

3 ‘‘(3) WAIVER.—The Commission may, by rule,

4 permit an investment adviser to omit disclosure re5 quired by this subsection with the knowing written

6 consent of the client.

7 ‘‘(4) EXCEPTIONS.—This subsection shall not

8 apply—

9 ‘‘(A) with respect to any purchase or sale

10 for which the investment adviser, and any per11 son associated or under common control with

12 the investment adviser, will not receive any por13 tion of the amount charged or deducted in con14 nection with the purchase or sale, and will not

15 receive any payment from a third party re16 quired to be disclosed under paragraph (1);

17 ‘‘(B) with respect to accounts for which

18 the person is authorized to exercise investment

19 discretion; or

20 ‘‘(C) with respect to any account for which

21 the person is not acting as an investment ad22 viser.

23 ‘‘(5) SPECIAL RULE.—The provisions of this

24 subsection shall also apply to any person associated

25 with an investment adviser effecting transactions for
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1 advisory clients through a broker or dealer with

2 which the person is associated.

3 ‘‘(d) PERIODIC REPORTS.—

4 ‘‘(1) IN GENERAL.—Each registered investment

5 adviser shall provide to each client a periodic written

6 statement in such form and containing such infor7 mation as the Commission shall prescribe by rule

8 consistent with the public interest, the protection of

9 investors, and the purposes of this title. Such rule

10 shall require the disclosure of—

11 ‘‘(A) commissions, fees, or other charges

12 paid by the client during the period for services

13 provided by the investment adviser and any per14 son associated or under common control with

15 the investment adviser;

16 ‘‘(B) compensation directly or indirectly re17 ceived during the period by the investment ad18 viser, or any person associated or under com19 mon control with the investment adviser, from

20 any third party with respect to any rec21 ommended transaction;

22 ‘‘(C) in the case of a client account for

23 which the investment adviser provides invest24 ment supervisory services, securities positions
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1 held in the account at the beginning and at the

2 end of the period; and

3 ‘‘(D) such other matters as the Commis4 sion shall prescribe.

5 ‘‘(2) COMMISSION RULES.—The rule prescribed

6 by the Commission pursuant to paragraph (1) shall

7 require that the format and timing of delivery be de8 signed to present the required information in a man9 ner that readily permits clients to compare the costs

10 charged by the investment adviser with the costs

11 charged by other advisers. In adopting such rule, the

12 Commission shall require an investment adviser

13 whose clients purchase or sell investment products

14 through persons other than such adviser, or persons

15 associated or under common control with such ad16 viser, to disclose to its clients that such information

17 concerning costs charged does not include commis18 sions or other fees paid in connection with such pur19 chases or sales. Such rule shall, to the extent con20 sistent with the protection of investors, permit deliv21 ery of a report of a broker or dealer that includes

22 information that meets the requirements of this sub23 section (and the rules adopted thereunder) in order

24 to satisfy such requirements.
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1 ‘‘(3) WAIVER.—The Commission may, by rule,

2 permit an investment adviser to provide the state3 ment required by paragraph (1) no more frequently

4 than annually if the client knowingly waives, in writ5 ing, the right to obtain such statement more fre6 quently than annually.

7 ‘‘(4) EXCEPTION.—This subsection shall not

8 apply with respect to any account for which the per9 son is not acting as an investment adviser.

10 ‘‘(e) FACILITIES FOR FILING RECORDS AND RE11 PORTS; ACCESS TO DISCIPLINARY AND OTHER INFORMA12 TION.—

13 ‘‘(1) FILING DEPOSITORIES.—The Commission,

14 by rule, may require any investment adviser—

15 ‘‘(A) to file with the Commission any fee,

16 application, report, or notice required by this

17 title or by the rules issued under this title

18 through any entity designated by the Commis19 sion for that purpose; and

20 ‘‘(B) to pay the reasonable costs associated

21 with (i) such filing, and (ii) the maintenance of

22 the toll-free telephone listing required by para23 graph (2).

24 ‘‘(2) LISTING FOR TOLL-FREE INQUIRIES.—The

25 Commission shall require the entity designated by
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1 the Commission to receive fees, applications, reports,

2 or notices pursuant to paragraph (1) to—

3 ‘‘(A) establish and maintain a toll-free tele4 phone listing to receive inquiries regarding the

5 disciplinary and other information involving in6 vestment advisers and persons associated with

7 investment advisers; and

8 ‘‘(B) respond promptly to such inquiries in

9 writing.

10 Such designated entity may charge persons, other

11 than individual investors, reasonable fees for the

12 cost of providing written responses to inquiries. Such

13 designated entity shall not have any liability to any

14 person for any actions taken or omitted in good

15 faith under this paragraph.’’.

16 (b) RULEMAKING REQUIRED.—The Commission shall

17 prescribe rules for purposes of subsections (b), (c), and

18 (d) of section 204 of the Investment Advisers Act of 1940

19 (as added by subsection (a) of this section) within one year

20 after the date of enactment of this Act.

21 SEC. 7. BOND REQUIREMENT.

22 Section 208 of the Investment Advisers Act of 1940

23 (15 U.S.C. 80b–8) is amended by adding at the end the

24 following:

25 ‘‘(e) BOND REQUIREMENT.—
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1 ‘‘(1) IN GENERAL.—The Commission, by rules

2 for the protection of investors, shall require any in3 vestment adviser registered under section 203 who—

4 ‘‘(A) is authorized to exercise investment

5 discretion, as defined in section 3(a)(35) of the

6 Securities Exchange Act of 1934, with respect

7 to an account,

8 ‘‘(B) has access to the securities or funds

9 of a client, or

10 ‘‘(C) is an investment adviser of an invest11 ment company, as defined in section 2(a)(20) of

12 the Investment Company Act of 1940,

13 to obtain a bond from a reputable fidelity insurance

14 company against larceny and embezzlement in such

15 reasonable amounts and covering such officers, part16 ners, directors, and employees of the investment ad17 viser as the Commission may prescribe.

18 ‘‘(2) CONSIDERATIONS IN RULEMAKING.—In

19 implementing paragraph (1), the Commission shall

20 consider—

21 ‘‘(A) the degree of risk to client assets that

22 is involved;

23 ‘‘(B) the cost and availability of fidelity

24 bonds;
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1 ‘‘(C) existing fidelity bonding require2 ments; and

3 ‘‘(D) any alternative means to protect cli4 ent assets.

5 ‘‘(3) EXEMPTION AUTHORITY.—The Commis6 sion by rule may exempt any person or class of per7 sons, under such terms and conditions and for such

8 periods as the Commission shall provide in such

9 rule, from the requirements of this subsection and

10 the rules thereunder.’’.

11 SEC. 8. DISQUALIFYING CONDUCT.

12 (a) AMENDMENT.—Section 203(e) of the Investment

13 Advisers Act of 1940 (15 U.S.C. 80b–3(e)) is amended—

14 (1) by redesignating paragraphs (3) through

15 (7) as paragraphs (4) through (8), respectively; and

16 (2) by inserting after paragraph (2) the follow17 ing new paragraph:

18 ‘‘(3) has been convicted within ten years pre19 ceding the filing of any application for registration

20 or at any time thereafter of any crime that is pun21 ishable by imprisonment for one or more years and

22 that is not described in paragraph (2) of this sub23 section or of a substantially equivalent crime by a

24 foreign court of competent jurisdiction.’’.
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1 (b) CONFORMING AMENDMENTS.—Section 203 of

2 such Act is further amended—

3 (1) in subsection (e)(6) (as redesignated by

4 subsection (a) of this section), by striking ‘‘this

5 paragraph (5)’’ and inserting ‘‘this paragraph (6)’’;

6 (2) in subsection (f)—

7 (A) by striking ‘‘paragraph (1), (4), (5), or

8 (7)’’ and inserting ‘‘paragraph (1), (5), (6), or

9 (8)’’; and

10 (B) by striking ‘‘paragraph (3)’’ and in11 serting ‘‘paragraph (4)’’; and

12 (3) in subsection (i)(1)(D), by striking ‘‘section

13 203(e)(5) of this title’’ and inserting ‘‘subsection

14 (e)(6) of this section’’.

15 SEC. 9. CONFIDENTIALITY.

16 Section 208 of the Investment Advisers Act of 1940

17 (15 U.S.C. 80b–8), as amended by section 7, is further

18 amended by adding at the end the following new sub19 section:

20 ‘‘(f) DISCLOSURE OF CLIENT INFORMATION PROHIB21 ITED.—

22 ‘‘(1) ADVISER DISCLOSURE.—It shall be unlaw23 ful for any investment adviser to disclose any per24 sonally identifiable financial information with respect
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1 to any client unless required by law to do so, or un2 less—

3 ‘‘(A) the client has been adequately in4 formed of the proposed information disclosure,

5 in accordance with rules prescribed by the Com6 mission, and (i) has been afforded the oppor7 tunity, in accordance with such rules, to object

8 to the disclosure, and (ii) has not objected or

9 has affirmatively consented;

10 ‘‘(B) the information disclosed is necessary

11 and appropriate in order to establish an advi12 sory or brokerage account or to effect or at13 tempt to effect a transaction for the client;

14 ‘‘(C) the information (i) is requested by

15 representatives of the Commission, a State

16 agency whose primary assignment is the regula17 tion of the securities business, or a self-regu18 latory organization, or (ii) is requested by sub19 poena; or

20 ‘‘(D) the information is requested by the

21 client’s auditors or accountants.

22 ‘‘(2) SECONDARY DISCLOSURE.—It is unlawful

23 for any person to whom information is disclosed for

24 the purpose described in paragraph (1)(B) to use
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1 such information for any purpose other than the ef2 fectuation of the client’s transaction.’’.

3 SEC. 10. CUSTODIANSHIP.

4 (a) FINDINGS.—The Congress finds that—

5 (1) most clients of investment advisers who give

6 their advisers discretionary authority over their secu7 rities and funds provide for the safekeeping of their

8 securities and funds with a custodian;

9 (2) it is a customary business practice for

10 custodians to provide reports of the transactions in

11 client accounts directly to clients;

12 (3) such direct reporting provides an important

13 safeguard against improper use of client assets; and

14 (4) permitting advisers to serve as the sole re15 cipient of custodial account communications has al16 lowed, and may continue to allow, unscrupulous per17 sons to misuse client assets, causing substantial

18 losses for those clients.

19 (b) REPORT.—The Commission, within 18 months of

20 enactment of this Act, after consultation with the appro21 priate Federal banking agencies (as such term is defined

22 in section 3(q) of the Federal Deposit Insurance Act),

23 shall submit a report to Congress—

24 (1) analyzing the risks to investors when an in25 vestment adviser is made the sole recipient of com-
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1 munications from the custodian or when an invest2 ment adviser or affiliate thereof serves as the custo3 dian; and

4 (2) making any recommendations the Commis5 sion believes are necessary to eliminate or reduce

6 these risks.

Passed the House of Representatives May 4, 1993.

Attest: DONNALD K. ANDERSON,

Clerk.

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